Make the banks pay: time for a second Bretton Woods

By Neil Warner

The recent meeting of G20 world leaders has gained a large amount of attention. The focus of the meeting was apparently “currency wars”, the competitive devaluation of currencies that is being pushed by countries such as China. There is a general agreement that the recent rise in protectionism when it comes to global capital flows and cash transactions is a very dangerous development. To an extent this is very much true.

But this general preoccupation misses out on the overall picture. The competitive devaluations are merely a symptom of a different disease stemming from the manner in which global finances are conducted: as a game with high stakes and practically no policing. The French President, Nicolas Sarkozy, asserted last year, and has since repeated, that “we must rethink the financial system from scratch, as at Bretton Woods.” That assertion deserves consideration.

We have frequently heard over the last couple of years that we are experiencing the worst global crisis since the Second World War, something arising from the fact that 2009 was the world’s first global economic contraction for 60 years. Surely a crisis that draws such parallels should call for a concomitant reaction? The world in 1944 in Bretton Woods, New Hampshire, responded with an unprecedented proposal of institutions for global economic regulation and came up with the IMF and the organisations we now know as the World Bank and WTO. Its purpose was essentially to facilitate the regulation of an economy which, if unregulated and unprotected by any centralised guidance, had the potential to send the world into catastrophe as it did in the 1930s.

What was dreamt up then now no longer works for our global economy today. Our current crisis should provoke a similar response to that in 1944, driven by the knowledge that we cannot regulate the world of 2010 with tools largely concocted in the 1940s.
The term “a Second Bretton Woods” has been interpreted in a number of different ways. However in general it involves a recognition that we have, for a long time now, been working with antiquated machinery. The old Bretton Woods system has not really been working since the United States went off the gold standard in 1971, a circumstance described by Noam Chomsky as the most important world event since World War II. Since this has happened, cross-border capital flows have been given a devastating liberty and operate at a rate which old institutions cannot keep up with. Since currencies have no intrinsic value, countries can engage in devaluations and beggar-thy-neighbour policies at will.

It is generally accepted that the atrociously liberal financial system that instigated the current crisis needs regulation. The main point, however, is that reforms cannot be limited to provisional, national stopgaps that are entirely focused on the specific causes of the 2008 crisis. Traders operate at supranational levels and can consequently avoid taxation and regulation that governments whose power is restricted to the parochial cannot deal with. Just as the anarchic international system of the interwar period limited governments to myopic self-interest, so the contemporary world is driven to a similar myopic deregulation and currency wars by the lack of an international mechanism to enforce our common interest. This helped precipitate the global financial crisis, but it also makes recovery from and repayment for the damage more difficult.

Because of the quick and easy supranational mobility of the current financial system, nationally-implemented policies cannot work in the long term. This applies to every government, whether it is the American government’s attempt to limit the size of financial institutions or the EU’s regulation of hedge funds and private equity. Additionally, unregulated capital flows will continue to bring the havoc they have already brought to Latin American and East Asia in the last few decades.

The IMF-centred system of regulating global finance is rotten on a countless number of levels and cannot work in a modern system which is so completely globalised. There needs to be an entirely new institution for regulating global financial transactions if we are to get a sane global economic system or any level of justice for what has already happened.